Neither the bond market nor the Fed appear especially concerned about the current inflation rate in the U.S. The 10-year U.S. Treasury yield sits at just under 1.5% suggesting that the bond market doesn’t view sustained inflation as much of a risk.
After a rocky start to the year, the 10-year yield has broadly declined since April, causing bond prices to rise. The Fed too is on record as viewing the current rise in inflation as transitory, and hence not requiring an immediate policy reaction.
This month we’ll get more news on how the current inflationary episode is playing out, both in terms of underlying numbers for June and the Fed’s reaction to it.
Fed Minutes and Meetings
The Fed will release minutes from their June meeting tomorrow. That’s backward looking since the outcome of the meeting is already known, but should provide more color on the discussion around the inflation, that the Fed suspects is due to “transitory factors”.
Then on July 28th the Fed should announce its next rate decision. No chance of movement on rates is expected according to the CME’s FedWatch tool. Still, the Fed’s progress on easing back from its tens of billions of dollars asset purchases each month will be closely monitored. It is likely that Chairman Powell will have a chance to expand on the Fed’s view on inflation at the press conference.
On July 13th, we’ll see June’s inflation data. This came in at a 5% annual rate for June, and those expecting inflation to be transitory will hope to see some moderation here. On July 30th, we’ll also see the PCE price index, providing another data point on inflation. It rose at a 3.4% year-on-year rate for the May release.
Part of the story with transitory inflation, is that the base level of inflation from 2020 was low because of we were lapping some of the most extreme periods of the pandemic. If that holds, then June is an important month. It was when inflation in 2020 rose off the low levels of April and May. As a result, the Fed, and others, might be expecting inflation to reduce in this month’s reports.
So far in 2021 despite some jitters, neither the bond nor stock market appear too worried about inflation. If inflation were a major concern investors would want to position their portfolios quite differently. Though bonds may actually hold up better than many expect.
The Fed’s view that inflation is transitory seems to be largely shared by the markets, for now. July will test that theory as June’s inflation data come in. We’ll also learn from the Fed’s most recent minutes and their July decision how U.S. inflation and the policy reaction to it might evolve.